Payroll tax cut should be made permanent

February 13, 2012

On the payroll tax cut, Republicans are playing tiddlywinks. Democrats are playing poker.

President Barack Obama and the Democrats in Congress want to extend the 2 percentage-point cut in the payroll tax — the Social Security tax most workers pay — that was enacted in December 2010. The tax cut expired in December 2011, but was extended until Feb. 29. The cut dropped to 4.2 percent from 6.2 percent the amount of income each employee is taxed.

The options are for another short-term extension, to Dec. 31 (and through the November election) or to make the tax cut permanent. Congressional negotiators also are approaching a Friday deadline, when Congress is scheduled to go into recess. Democrats have pushed the tax cut because it goes to working people, whom they want to attract as voters.

Republicans have been hesitant because the tax cut adds close to $90 billion a year to the federal deficit. The deficit is expected to be $1.1 trillion through fiscal year 2012, which ends on Sept. 30. That amount was a bit less than the $1.3 trillion deficit for fiscal year 2011. But it’s an incredible amount of money that adds to the current federal debt of $15.3 trillion.

Are Democrats bluffing? Would they let the payroll tax cut expire at the end of this month, thus sticking it to workers and throwing blame on Republicans?

AP reported that some Republicans want “to partially pay for the two-percentage-point payroll tax holiday through freezing federal workers’ pay and requiring more affluent seniors to pay higher Medicare premiums.” Well, we’re all for freezing federal workers’ pay, which according to some studies is double that of equivalent jobs in the private sector. And Medicare needs to be reformed. But those issues can be dealt with later.

Republicans should start playing real poker. They should call the Democrats’ bluff and insist on making the payroll tax cut permanent.

“It would continue the economic growth we’re enjoying, and that’s good news,” Esmael Adibi told us; he’s Director of the A. Gary Anderson Center for Economic Research at Chapman University. “A big portion of that will be spent by consumers. If Republicans say ‘no,’ then come the election, Democrats could say the Republicans didn’t help working people.”

He agreed that adding to the deficit and debt is a problem. “But there are tradeoffs,” he said. If the payroll tax cut is eliminated, it would suck $90 billion out of the private economy. “But over the long run it’s a problem because of the deficit and debt. As long as we come up with a solution to those problems, then it’s a good idea.”

We believe that making the payroll tax cut permanent — or at least extending it to Dec. 31 — would send a signal that Congress is serious about continuing the current economic growth, which after all is modest, thus forestalling a recession. An economic crash would create more joblessness, which in turn also would cut payroll tax payments because the unemployed don’t pay the tax.

As to the deficit and debt, they ought to be dealt with through cutting current spending. There’s plenty of room for savings in a fiscal 2012 budget projected to run to $3.7 trillion. Long-run solutions to these problems, as well as to Medicare, Social Security and other entitlements, will have to wait until the presidential and congressional races are decided in November. Until then, Republicans should put on their poker faces and increase the bid to a permanent payroll tax cut.